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Selective Hiring and Welfare Analysis in Labor Market Models

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Author Info

  • Merkl, Christian

    ()
    (University of Erlangen-Nuremberg)

  • van Rens, Thijs

    ()
    (University of Warwick)

Abstract

Firms select not only how many, but also which workers to hire. Yet, in standard search models of the labor market, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6294.

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Length: 29 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6294

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Keywords: labor market models; welfare; optimal unemployment insurance;

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Cited by:
  1. Regis Barnichon & Andrew Figura, 2013. "Labor Market Heterogeneity and the Aggregate Matching Function," Working Papers 727, Barcelona Graduate School of Economics.

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